ECB’s Nagel: More Clarity on Wages and Profits Needed to Cut Interest Rates

23 February 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member Joachim Nagel on Friday said that more clarity on the price outlook, which now depended mostly on wages and profits, was necessary to support the decision of reducing interest rates.

During the press conference following the release of the 2023 German Bundesbank Annual Accounts, Nagel, who heads the institution, said, ‘Even though it may be tempting, it is too early to cut interest rates. This is because the price outlook is not yet clear enough.’

‘For me the sequence is clear. First, we, that is the ECB Governing Council, need to be convinced based on the data that inflation will actually and sustainably achieve our target. This largely depends on wage developments coupled with profit margins’, he elaborated.

Even though the 2% target was ‘much closer’ and the disinflation process was likely to continue in the euro area, core inflation would still be above 2% in the near future, he said.

Before contemplating the possibility of cutting interest rates, the Governing Council needed ‘clearer evidence that we will achieve our target reliably and soon’, he said.

‘If we reduce interest rates too early or too sharply, we will run the risk of missing our target. In the worst case scenario we might even have to raise interest rates again’, he said. ‘It is important to avoid such a wavering policy as it would be costly for the economy.’

The ECB’s tight monetary policy was working desirably and contributing to a decline in inflation, but there were still challenges, since ‘the target has not yet been achieved and it won’t happen by itself’, he said.

‘It does not look as though a series of large decreases in inflation rate, as seen in the last quarter of 2023, is to be expected anymore’, he said. ‘In other words, we’ll have to get used to small steps.’

The nature of inflation had changed drastically compared to one year ago, as the annual average for 2022 headline inflation was almost twice as high as core inflation, whereas, more recently, core inflation had become ‘significantly higher’, he said.

‘The interest rate level we’ve achieved should be enough to push the inflation rate down to 2%, provided we keep interest rates high enough for long enough’, he said.